Intro We know the following expected returns for stocks A and B, given different states of the economy State (s) Recession Normal Expansion Probability E(TA) E(BS) 0.1 -0.02 0.01 0.5 0.13 0.04 0.4 0.21 0.08 The required return on the market portfolio is 0.05 and the risk-free rate is 0.02. Part 1 Attempt 1/10 for 9.8 pts. What is the standard deviation of returns for stock A? Correct Expected return: Era) = 2s (PsElra..)) =0.1 (-0.02) + 0.5 0.13 + 0.4 0.21 0.147 Variance: O2 = Es (Ps is - Era) = 0.1 (-0.02-0.147)2 +0.5*(0.13-0.147)2 +0.4 (0.21-0.147)2 = 0.004521 Standard deviation: o = 10 -0.00452112 = 0.0672 Part 2 Attempt 1/10 for 10 pts. What is the standard deviation of returns for stock B? Correct Expected return: Elrg) = Es (P.Elrb.) = 0.1 0.01 +0.5*0.04 +0.4 0.08 = 0.053 Variance: o2 = 2s (Psirs - Eire) = 0.1 (0.01-0.053)2 +0.5 (0.04-0.053)2 +0.4 - (0.08-0.053)2 = 0.000561 Standard deviation: 0 = 102 -0.0005611/2 = 0.02369 Part 3 IB Attempt 4/10 for 9.6 pts. What is the beta for stock A? 2+ decimals Submit IBAttempt 1/10 for 10 pts. Part 4 What is the beta for stock B? 2+ decimals Submit Attempt 1/8 for 10 pts. Part 5 IB Which stock has more total risk? The stock with the lower standard deviation The stock with the lower beta The stock with the higher standard deviation The stock with the higher beta